Leave time to make his son
Billy’s soccer game and have dinner
out with the family.

John opens his email and
starts scouring his inbox for the daily
tax updates, but his attention is drawn to
the three emails from a client all sent
between 5 p.m. yesterday and 8 a.m. today.
All of the messages are flagged with a red
exclamation mark.

Suddenly John’s
shoulders tighten, his stomach quakes, and
his temples begin to throb. Despite his
well-thought-out plan, he has to open
those client emails; after all, they could
be important.

As he feared, the
client is in a hurry to get his returns
filed and is very frustrated. After all,
he dropped off most of the tax return
documents last week and emailed the
remaining items yesterday morning. As he
told John when they met last week, this is
a very simple return that John should be
able to complete with minimal effort, and
he wants to get this out the way so it
will not be hanging over him.

All
too often this or similar scenarios occur
at CPA firms. Anyone with more than a
year’s experience in a tax practice knows
the rest of the story.

John is the
fourth CPA this client has hired in as
many years. He spoke disparagingly about
them (wonder what he will say about you?).
The client was not comfortable leaving a
retainer when he dropped off the
information because he has trust issues.
The return most likely contains complex
issues that require additional work, and
it is likely the client has not provided
all relevant information upfront. It is
also likely that the client is not willing
to pay for the additional work that may be
required.

This is an obvious example
of a “bad” client, and the decision to
part ways should not be too difficult.
But, often, the decision is not as
obvious. In reality, there are a variety
of reasons that clients should be asked to
leave the firm. The average CPA can follow
certain steps to recognize these
situations and take appropriate
action.

Precautionary Measures

CPAs are taught to exercise due
diligence when bringing on new clients.
CPAs should assess whether they have the
technical knowledge to perform the work
and the available staff and resources.
They should also assess whether the
potential client’s expectations are
reasonable and whether its management team
exhibits high levels of integrity.

If a CPA firm does not have a client
acceptance policy that evaluates these
issues along with many others, it is time
to create one. The AICPA has resources
on its website that are helpful when
deciding whether to accept new clients.
Most professional liability insurance
carriers have materials and checklists
available. Even a general internet search
will produce numerous results on new
client screening techniques.

While
it is not always possible to weed out bad
clients before bringing them on board, it
is best to try. Anyone who has had to fire
a bad client would probably agree that it
would have been better to have never
accepted the client in the first
place.

This is certainly not an
all-inclusive list, but the following are
a few warning signs CPAs should look out
for when meeting with potential clients.
Consider whether the prospective
client:

Has changed CPAs
often;

Is rude to office
staff;

Will not allow
contact with prior CPAs;

Tries to haggle down the fees;

Keeps records in poor condition;

Needs a project completed
quickly;

Is not willing to
leave a retainer;

Is
hesitant to sign an engagement letter;

Is currently delinquent in
filings;

Insists on being
the only contact; and

Comes in close to a tax deadline.

It is best to slow the
process of bringing a new client onboard
and thoroughly vet the client before
accepting the engagement. In an ideal
world, this would always happen. In
reality, most, if not all, CPAs have some
bad clients. It is important to identify
clients that are not a good fit and ask
them to leave.

Bad clients are generally pretty easy
to identify. If partners have any doubt
about who their bad clients might be, they
should ask the front office staff. Staff
members often know exactly which clients
are troublemakers.

Bad clients are
ones who:

Are abusive to
staff;

Complain about
fees;

Lie or conceal
information;

Set
unrealistic deadlines;

Do
not follow advice;

Blame
others for problems; and

Monopolize staff time.

However, firing clients is not always
about getting rid of bad clients in the
traditional sense. CPAs should evaluate
their client base regularly and make sure
that existing clients are a good fit with
the firm’s mission and culture.

A
firm that has chosen to embrace new
technologies may find that some clients
are not keeping up. Implementing a
paperless workflow system may require all
clients to complete online tax organizers
and sign electronic engagement letters.
Some clients are not going to be
comfortable with this new process, and
their accounts will have to be handled
differently. This is going to slow
processing and may increase both the cost
and the likelihood that things will be
missed. A firm needs to seriously consider
how long it can make exceptions for
clients that are not willing to
change.

Perhaps the firm has had some
turnover in staff, and the people who were
the strongest in real estate transactions
are gone. Evaluate whether the firm has
enough clients in this area to make it
cost-effective to bring the remaining
staff up to speed. If not, or if suitable
replacements cannot be hired, the firm may
not have the technical competence to
continue working with these clients.

An annual assessment of fees earned by
each service line may indicate that a
disproportionate amount of time is being
spent on a low-profit service. Firms may
also find that the costs of offering a
service that is not routinely performed
outweigh the fees the service generates.
For instance, a tax practice that has only
a handful of clients that require annual
reviews may need to consider dropping this
service. The cost of educating the staff
on the AICPA Statements of Standards for
Accounting and Review Services (SSARS),
purchasing technical guidance materials,
and paying for required peer reviews can
cut into any potential profit.
Furthermore, the time spent staying up to
date on just one service cuts into the
time the staff could use to learn more
extensive tax planning or compliance
techniques.

The firm’s leaders should
meet at least annually to review the
direction of the practice. They should
evaluate the firm’s mission; how many
clients the firm can honestly manage while
providing exceptional service; what client
services the firm performs the best, or at
the highest rate of profit; and what is
the profile of its perfect client.

The results of this discussion can be
used as the basis for criteria to evaluate
current and future clients. It can be as
simple as creating five to seven questions
(must be an uneven number to avoid a tie)
that require “yes” or “no” answers. A
“yes” means the client meets the firm
criteria, and “no” means the client does
not. The client list can be formatted in
Excel, and a basic formula can be created
that says if the “no” answers outweigh the
“yes” answers, then the client should be
fired.

While the list of clients the
formula says to fire must be reviewed
before taking any action, the reviewers
should also be true to the standards they
have set. It may be tempting to decide to
keep a client who is enjoyable to visit
with each year. However, if the majority
of the results are contrary to what the
firm values, the client is not a good
fit.

Preparing to Fire Clients

Once the firm has determined which
clients to fire, it is wise to devise a
strategic plan for carrying out the
terminations.

It is good to start by
contacting the firm’s professional
liability carrier to advise it of the
plan. Since there may be a few disgruntled
clients on the termination list, the
carrier may want to be alerted to any
potential claims. The loss prevention
teams have experience in firing clients
and can be a good source of information on
best practices for this process. In
addition to offering advice on how best to
disengage, the insurance carrier may have
sample disengagement letters that can be
modified to suit the firm. Some insurers
may even offer to review the firm’s
modified letter before it is sent to
clients.

The most common method for
firing clients is to send a disengagement
letter via certified mail with return
receipt requested. However, care should be
taken when firing clients who have close
personal relationships with members of the
firm or those that have some strategic
value, but not enough to warrant keeping
them as clients. These clients should be
told in a face-to-face meeting, whenever
possible, or at the very least by phone. A
letter should be sent as a follow-up to
document the meeting or conversation. It
is best to follow the advice of the
insurer if the firm is considering firing
clients via email.

Before notifying
clients, the firm should make sure there
are no current projects in process for any
of the clients who are to be fired. If
current projects are in process, the firm
must decide whether to complete the
projects or terminate the services
immediately. The firm should address the
planned level of involvement in continuing
the work in the disengagement letter.

Ideally, it is best to disengage in
advance of any deadlines, but this is not
always possible. If the client has any
upcoming deadlines or tax filing
requirements, it is a good idea to spell
these out in the letter.

To aid in
a smooth transition, the client’s files
should be prepared prior to notification.
The firm should make sure that all
original documents have been copied or
scanned; all agreements and authorizations
have been signed; all fees are paid (if
possible); and all client documents are
neatly organized, packaged, and labeled to
be returned. It is also a good idea to
have a staff member prepare authorizations
to release information for each client
being terminated and place them in the
client’s permanent folder. This will speed
up the process when the new CPA contacts
the office requesting documents. The
authorization can be sent to the client
for a signature.

If the firm uses a
client portal system, the letter should
address when the client’s access will be
removed. This will allow the client time
to download copies of any documents it may
need for future reference.

The
process is almost complete; now it is time
to prepare the firm’s staff.

Firing the Clients

Once the
list is complete and the letters are
ready, it is a good idea to meet with
staff to discuss what is about to happen.
While many of the staff members have
counted the days to see their least
favorite client fired, they may not be
truly prepared to handle what is about to
happen.

The people involved will vary
depending on the size of the firm. In a
small firm, it is probably best to include
everyone in the discussion. Larger firms
are more likely to include only the key
staff on the engagement, although it is
generally advisable to have some members
of the firm who are not directly involved
with the client participate in the
decision-making process. Staff should be
made aware of what is happening and why.
Staff should also be given examples of how
to respond if contacted directly by the
terminated clients. The fear of
confrontation makes many people uneasy, so
helping them prepare for any possible
conversations may alleviate unnecessary
anxiety.

This is also a great
opportunity to remind staff of the firm’s
mission and future direction. It is human
nature to be concerned about job security
when sources of revenue are going
away.

Some staff may fear that losing
key clients, even bad ones, will have an
effect on their job. It is important to
focus on the positive elements of the
change. For instance, the stress level
will most likely decrease; work hours will
drop; and the team can spend more time
focusing on delivering exceptional service
to the clients the firm retains, and
bringing in new and (hopefully) better new
clients. The result should be that
everyone has a better quality of life, is
happier, and is more productive. This
should also result in bigger profits.

The firm should decide ahead of time if
it is going to provide referrals to other
CPAs. It is probably not a good idea to
send bad clients to someone you like. On
the other hand, if a client is fired
because of a business motive, it would be
helpful to assist in finding a
replacement.

Prior to giving out
names, it is best to contact potential
referral sources to make sure they are
interested in accepting new clients. If
they are accepting new clients, it is a
good idea to find out what their ideal
client looks like. A list can then be
prepared of possible CPAs with their
client criteria. All relevant staff can
have this list available when they are
asked to provide a referral.

The
Client Has Been Fired, Now What?

The feelings that accompany firing
clients may vary widely. Certain staff
members may be elated that they are
finally unburdened from difficult clients.
Some may be sad at the loss of
relationships and the uncertainty that
awaits them or the practice. Others will
be anxious, wondering how terminated
clients will receive the news and what
those clients may say or do in
response.

It is best to remind staff
why the clients were fired and the
benefits the process should reap. Posting
the firm mission statement and goals
nearby could provide support. It will also
help if clients call and want a personal
explanation or ask the firm to reconsider.
If the clients do call, it is best to be
polite but firm. The client must be
reminded that this was a business decision
and not personal. If the firm has opted to
offer names of potential new CPAs, this
would be a good time to present those
names.

On an administrative level,
clients that have been fired need to be
removed from the firm’s client management
system. It is best to create a checklist
of tasks to be completed when clients are
terminated. It should include things such
as removing them from client email and
mailing lists; changing them to inactive
in the billing system; archiving their
client files; removing their access to
client portal systems, etc.

Make
sure all client records are handled
properly and in accordance with firm
procedures and professional and legal
retention rules. CPA professional
standards require that all original client
data be returned, and most states have
specific requirements for how long client
data must be kept.

It is always
best if the relationship can end on good
terms, so remain professional through the
process regardless of the client’s
behavior. Remember that this decision was
best for the firm, the staff, and the
client.

What to Do With All of the
Free Time?

The process of pruning
a practice is by no means simple and
without challenges. It is difficult to end
relationships of any kind, but the reality
is that getting rid of the wrong clients
makes room for the right clients. Chances
are good that if a firm has been
struggling under the strain of bad
clients’ demands, the good clients have
suffered.

This is the perfect time to
reconnect with the good clients. Find a
way to reach out to them with a
handwritten note or get together with them
for coffee or lunch. Let them know about
the changes the firm has made and the
renewed purpose in serving only those
clients aligned with the firm’s mission.
The firm should ask how it can serve them
better, and the chances are good that they
will give honest answers. This feedback
should be useful in providing more and
better services to those clients. When
they are satisfied, ask them to refer
others who they believe will be a good
fit. Use free time to become more involved
in business, professional, and civic and
charitable groups as these activities are
often personally fulfilling and may lead
to potential new client engagements.

Finally, take some time to reconnect
with the family and friends who have
likely been neglected. A rewarding life
outside of the firm is important in
keeping everyone happy and healthy.

Steven Holub is a National
Director in the Professional
Practice Department of Cherry
Bekaert LLP in Tampa, Fla., and is
a former chairman of the AICPA Tax
Division Tax Practice Management
Committee. Kenneth Parker is with
Parker and Associates, CPAs, in
Jackson, Miss. Cari Weston is a
sole proprietor with a tax
practice in Austin, Texas. Mr.
Parker is chairman and Ms. Weston
is a member of the AICPA Tax
Practice Management Committee. For
more information about this
column, contact Ms. Weston at cari@cwestoncpa.com.

The winner of The Tax Adviser’s 2014 Best Article Award is James M. Greenwell, CPA, MST, a senior tax specialist–partnerships with Phillips 66 in Bartlesville, Okla., for his article, “Partnership Capital Account Revaluations: An In-Depth Look at Sec. 704(c) Allocations.”

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